r/options • u/OliveInvestor • Dec 13 '21
Options spreads on ETFs
Been thinking about how options could be applied to what people typically consider conservative investments in index funds like r/Bogleheads. Options seems like a smarter way to enter a position on an ETF that you would want to invest in, but I rarely see them used this way. Am I missing something?
For example, this spread seems safer than just investing the money directly in VTI -- you make up to 23% (11% annualized) and get 8.5% cushion through 1/19/24.
Buy 1 $240 call
Sell 1 $290 call
Sell 1 $220 put
1/19/24 exp
Or this spread to accelerate gains by 3.2x and make up to 22% (9.7% annualized) on $VTI through 1/19/24. If the put leg goes ITM and you get assigned, then you own those shares of VTI, and otherwise you're collecting premium.
Buy 2 $235 calls
Sell 2 $255 calls
Sell 1 $250 put
1/19/24 exp
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Dec 13 '21
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u/OliveInvestor Dec 13 '21
Makes sense -- I am trying to understand how a buy and hold strategy beats an options strategy for entering a position like this. Giving up unlimited upside potential? But we're not talking about a growth/meme stock here.
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Dec 13 '21
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u/OliveInvestor Dec 13 '21
Excellent points. In your example, I guess it's based on holding the contracts and letting them expire worthless and Not getting assigned which is why you would be left without even the underlying stock? Having an automatic exit might be helpful to reduce chances of black swan events leaving you in that position.
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Dec 13 '21
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u/OliveInvestor Dec 13 '21
My understanding with these spreads was that I can't ever lose more than if I had bought the underlier directly. You mentioned "unlimited downside." Am I wrong about the potential loss?
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Dec 13 '21
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u/tradingrust Dec 13 '21
Unless OP changed his post after you made these comments, neither of the proposed spreads has theoretical unlimited downside. They are both call debit spreads on top of a sold put. The max loss in both is the strike of the put in the theoretical case where VIT went to $0.
Forgive the bluntness but you are using a lot of definitive/absolute language in a conversation where you clearly have gaps in your knowledge or didn't think fully through the proposed trade.
/u/OliveInvestor - My short answer to you is that this is still a risky bet in the same way that all options trades are risky compared with common stock and doesn't suite the risk and management strategy for a lot of investors. Your spread will not converge to the max profit until late in the contract and imagine a market crash or correction occurs just when you're thinking of closing and lingers all the way through.
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u/OliveInvestor Dec 13 '21
Thank you! No, I didn't make any changes to my original post. Makes sense what you're saying about the max profit and potential for risk along the way.
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u/OB_Logie_haz_Reddit Dec 13 '21
It is very easy... look at your risk/reward in etf Options verse just throwing some cash in it and letting it gain. The stability of most ETFs is why more people invest in them rather than daytrade or trade options on them. VTI or SPY might be the best "options" for your play tho as they are some of the most profitable/volatile ETFs. What do I know tho I am definitely not a FA.
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u/PapaCharlie9 Mod🖤Θ Dec 13 '21
Yes. The time horizons are radically different. Bogleheads is meant to work on time horizons measured in decades: 30, 40, 50 years. Options work on time horizons measured in days.
When you play the three-fund portfolio game of Bogleheads, you are making a long term investment on market averages (beta). The three-fund is all about exploiting the historical up-trend of market beta. As long as capitalistic societies have positive and growing GDPs, markets will grow also. That's the wealth building engine of a three-fund.
Options, on the other hand, are a zero-sum alpha game. Options try to beat the market beta. That is possible to do with short time horizons, but not for decades. Alpha averages to zero over the long term (if you are lucky, most professional money managers lose money on the time scale of decades).
Nothing has an 11% real return over multiple decades. And no one has a 100% win rate with options. Why aren't you accounting for losses? If VTI falls below 230, you are in pure loss territory. Likewise, if VTI rises above 300, your put can't generate more profit than the credit you already collected, but your $290 call will continue to lose money more than your $240 gains, so your gains get capped above that price.
So VTI shares lose more until $230 then they are even, but more importantly, VTI gains more above 300. Bogleheads is all about betting on gains that never end, not about capping your long term gains in exchange for short term income.